KASB Bank Limited was incorporated on October 13, 1994 as Platinum Commercial Bank Limited. The name of the bank was subsequently changed to KASB Bank Limited on February 21, 2003, when the majority shareholding was acquired by the KASB Group.
The merger of Khadim Ali Shah Bukhari and Co and KASB Leasing Limited into the bank increased the paid-up capital of the bank to Rs 1.293 billion as on December 31, 2003 complying with the regulatory requirements. Bank also owns a 100% stake in KASB Securities (Pvt) Limited and KASB Technology Services Limited. Currently KASB Bank operates through its network of 73 branches in 21 major cities of Pakistan and seeks to deliver unique and innovative financial solutions to a large portfolio of investment, corporate and consumer banking customers.
It is listed on all the three stock exchanges of the country. In order to meet the minimum capital requirement of Rs 6.0bn, the bank approved the merger of KASB Capital and Network Leasing Limited into KASB Bank. For this merger, the bank issued 361.8 million shares to the shareholders of KASB Capital and Network Leasing. Following the merger, the capital base of the bank reached around the level of Rs 9.5bn.
BANKING SECTOR OUTLOOK FY05-FY09
Pakistan has a progressive and dynamic financial sector, which has grown rapidly, particularly in the recent past, in response to the mounting financing needs of the economy. In response to financial liberalization reforms initiated in the early 1990s to develop a sound and competitive banking system, a number of private banks appeared in the banking arena. Till CY06, the burgeoning economy served as a cause and a consequent to the development of the banking sector. The demand for loans was on peak and repayment capacity of borrowers was strong. The size of the banking sector stood at Rs 4.3 trillion at CY06 end. NPLs to loans ratio for the sector registered a decreasing pattern over the last few years.
Resilience of the banking sector underwent a testing phase during CY07 when the benign macroeconomic environment of the previous four years started to show considerable signs of strain. The current macroeconomic environment is characterized by a decline in GDP growth, growing macroeconomic imbalances, relentless upsurge in inflation, depreciating domestic currency, and monetary tightening by the central bank.
Despite the heavy provisioning on account of incremental NPLs during CY07 and 1H08, withdrawal of the benefit of the Forced Sale Value (FSV) of collateral against non-performing loans during CY07, the banking sector in Pakistan showed strong resilience to early headwinds on the back of a robust capital base and healthy profitability. Key performance indicators present a healthy picture of the sector during CY07. The bottom line continued to remain in a comfortable zone, with an after tax return on assets (ROA) of 1.5 percent for the year: a more sustainable level of profitability compared with the peak level of 2.1 percent in CY06. The overall net profit of the banking sector for CY07 was Rs 73.3 billion. This was shared by a large number of banks, as 23 out of 39 banks, with a cumulative asset share of 87.2 percent, have their respective ROA at more than 1.0 percent at end CY07.
During the period Jul-December 2008, the private sector credit off-take from the schedule banks declined by 26 percent due to tight liquidity approach of the banks, slowdown in economic activity, hike in lending rates and frequent demand stresses. The full-year profits of CY08 were, however, lower than profits for the last couple of years, but still it remained profitable. The overall profitability was neutralizing due to more than proportionate increase in operating expenses and provisioning for the loan losses. NPLs have been on the rise, mainly due to poor economic performance of the economy and the FSV benefit therefore resulting in worsening of asset quality ratios.
Domestic financial markets particularly the banking sector continued to operate in one of the most challenging times in 2009 in the whole of Pakistan's economic history. Similarly the KASB Bank had to face these tough times. The tight liquidity conditions, distressed corporate performance and an overall weak macro economic situation were few of the elements that contributed to the current financial performance of the bank.
Pressure from the first half of 2009 continued to exist on the third quarter. With signs of limited improvement in the global economic markets, it is anticipated that the domestic financial market would also start registering improvement. However, this needs to be analyzed in the presence of the prevailing internal and external challenges Pakistan's economy is facing.
FINANCIAL PERFORMANCE FY05-FY09
Profitability: KASB Bank posted a loss of Rs 4.22 billion for the period FY09 mainly due to its inability to earn a net interest income as there was a significant increase in deposits and a decline in advances. In 2005 it incurred a loss of Rs 273 million. In 2006, in compliance with the minimum capital requirements prescribed by the State Bank of Pakistan (SBP), the bank has decided to merge with International Housing Finance Limited (IHFL), a company in which Nasir Ali Shah Bukhari, sponsor/director of the bank holds 64.33 percent shares. The year 2006 brought about significant changes for the bank. The entity adopted a new logo and signage, which was in alignment with re-branding endeavor of the bank. The 2006 also saw the witness of introduction of several consumer products.
The progressive movement of the bank along with the conducive economic environment helped the bank improve its bottom line factor immensely that it was able to emerge out of post-tax loss in 2005 and earn a post tax profit of Rs 137 million in the same year. Even though net interest earned registered a fall of 11% during 2005 and 2006, the bank was able to earn good returns of non-interest sources like sale of securities and dividend earned. This was in line with overall healthy economic activity. The reversals of previously recorded provisions registered a 2596% contributing positively towards profits. Operating expenses registered an increased but only moderately and hence didn't dampen the profits.
This situation improved by year on, as evident by the higher profit earned in 2007, marking an increase of 44%. This year witnessed the development of proper control mechanisms (ie risk management, internal control and internal audit), and heavy investment in the core banking system. Net interest income registered an incredible increase of 74%. The acquired business of IHFL contributed Rs 7.106 million to the operating income and Rs 4.245 million to the profit after tax of the bank for the year ended December 31, 2007 as the bank has obtained the control of IHFL as at the commencement of November 22, 2007. Profit after tax increased by 44%. Accumulated loss brought forward from CY05 dampened this high earnings but a turnaround was experienced as even after the loss adjustment, some profit was left over and hence added to the retained earnings.
The 2008 started as a year of intrinsic and fast growth. However, the market situation and the economic scenario changed drastically towards the middle of the year. As the global economic meltdown started shedding its affect on the banking sector, State Bank of Pakistan tightened its monetary policy and altered banking regulations to stricter standards. To meet the new requirement of a higher minimum capital requirement, schemes of amalgamation for merging KASB Capital Limited and Network Leasing Corporation Limited with and into KASB Bank Limited were initiated and subsequently sanctioned. The negative economic sentiments, the heavy impairment charges and associated rise in provisioning eroded the banks profitably considerably, as evident by the drastic dip in its profitability for the CY08. The bank netted an after-tax loss of Rs 972 million, plummeting from a positive return of Rs 197 million in CY07. Impairment cost shoot up 847% relative to 215% increase in the former year. Non-mark-up expenses also recorded an increase of 56% relative to 37% in CY07.
Bank's financial results for FY09 showed a significant decline in profitability as loss for the year before tax increased by 335% to Rs 4.22 billion. This was mainly due to an increase in interest expense from Rs 4.44 billion in FY08 to Rs 5.49 billion in FY09. The increase in interest expense was in line with the bank's focus to increase its branch network and create more demand for deposits. In addition, administrative expenses increased by 35.26% to Rs 2.3 billion and provisions for diminution in the value of investments reached Rs 1.14 billion.
The increase in provisions and bad debts contributed significantly to the loss for the period FY09. The Net Interest Income after provisions stood at negative Rs 2.94 billion against a negative Rs 1.8 billion for FY08. The weak economic activity in FY08 and decline of stock markets resulted in the bank creating high provision for anticipated decline in the value of investments. The interest income earned increased to Rs 5.061billion denoting a 4.12% increase. The bank was unable to issue fresh loans due to which there was a decline in advances in FY09. High NPLs and a slow growing economy were also contributed to low demand for these advances. The interest income expensed increased by 23.4% to Rs 5.4 billion. Much of this can be attributed to the high cost of deposits incurred by the bank.
The bank was largely impacted by domestic economic slowdown with 335% decline in its total income. The soaring cost of funds significantly impaired the bank's net interest income, which remained negative at Rs 428 million as compared to positive Rs 412 million in FY08. In addition to this, non-interest income also dropped 9.84% to Rs 555 million. The bank incurred losses in dealing with foreign exchange due to weak rupee. Moreover, expense side also portrays an unfavourable performance with 35% increase in non-interest expenses to Rs 2.4 billion. FY09 did not brought any improvement on non-interest income as it declined to Rs 555 million as against Rs 615 million in FY08. Much of the decline in non-interest expenses can be attributed to the rise in operating expenses. The bank is pursuing the strategy of increasing its branch network that may result in an increase in administrative expenses. During the year, non-interest income declined by 9.8% while net interest income reduced by 204%.
NPLs for the year increased to Rs 7.35 billion as against Rs 6.24 billion in 2008. The bank has availed the opportunity of additional relaxation of prudential regulation given by the State Bank of Pakistan with respect to FSV benefit and loan rescheduling and restructuring. The SBP has allowed the banks to avail 40% FSV benefit on pledge stocks, commercial and residential properties (30% previously). Moreover, the SBP also extended 40% FSV benefit to industrial properties, land and building only (0% previously). The SBP also provided relaxation to the bank in maintaining provision of 60% of the outstanding exposure to Dewan Mushtaq Group. This reduced the loss before tax of the bank by Rs 242.9 million.
The Pakistan Credit Rating Agency (PACRA) has maintained a medium to long-term entity rating of A (Single A) and a short-term rating of A-1 (A one). It is expected that the present changes in capital requirements will have a negative impact on these ratings.
EARNING RATIOS
The earning ratios project a dismal picture of the bank's operations during FY05 to FY09. These ratios declined even further in FY09 due to losses incurred by the bank. The ROE declined to negative 85.1% in FY09 as compared to negative 10.5% in FY08. The equity of the bank reduced even further mainly due to an increase of 335% in the losses incurred during the year. The bank managed to pick up from a negative 15% return to its equity in CY05 to a positive 6% in CY06 as it posted a positive after tax profit after a negative one in the former year. However, it was unable to uphold the upward trend and ROE declined to 5% in CY07. The ROE managed the same position in CY07. As the equity of the bank steadily increased from Rs 1.7 billion in CY05 to Rs 9.3 billion in CY08 in line with the prudential regulation of higher MCR, an associated rise in return was lacking.
The ROA ratio reduced to negative 7.1% for FY09. Despite an upward trend of earning assets (lending to financial institutes, advances and investments), the bank was unable to earn a significant net interest income. Low yielding earning assets and contained business volumes and corresponding high provisioning inhibits the bank to earn high returns. The Earning Assets (investments, lending to other financial institutes and advances) has registered an increase of 12.2% but the returns arising from these has been wiped off by the high cost of deposits. The deposits increased by 25% to Rs 43.8 billion in FY09, which resulted in an increase in interest expense.
ASSET QUALITY
The bank prudently provided for all required non-performing loans, mostly in the first half of 2009. Currently the bank is strengthening its strategy to consolidate the overall loan portfolio and extending support to its accountholders. As a result the overall advances portfolio has registered no significant movement however as a result of prevailing restructuring and recovery exercise, some of the provision on infected accounts have been reversed in the third quarter.
The NPLs recognized for FY09 were Rs 7.35 billion which shows an increase from the previous year. Despite annual increases in the deposit base, the bank managed to control NPLs around Rs 1 billion between CY05-07. However, this drastically shot up to Rs 6 billion in CY08. This has been in line with the industry trends. But the mushrooming figure poses a serious risk to the bank.
In the year ended 31 December 2009, the NPLs to advances ratio slightly increased to 24.93% from 19.4% in FY08. This signifies the high amount of NPLs, which the bank occurred in FY09 even though the advances declined. The bank was still facing the effects of the dampened economy and slow growing manufacturing sector, which faced energy crisis throughout the year. NPLs to advances ratio declined consistently between CY05 to CY07, showing that the bank employed a prudent credit policy to control its NPLs and higher level of advances relative to NPLs. However the situation reversed in CY08 as higher interest rates (owing to higher KIBOR rates) caused a huge number of defaulters resulting in a jump in the ratio, as NPLs accounted for around 20% of advances.
LIQUIDITY
Bank's earning assets to total assets have grown at more than industry averages. It shows a comfortable trend, indicating that its earning assets are maintained at a consistent level during the period under consideration. Advances as a percentage of total assets have declined to 50% in FY09 in contrast to 69% in FY05. The bank has been able to improve on other earning assets and thus have reduced the risks of NPLs. It's important that the advances are cushioned against deposits to ensure that bank has liquidity available. In FY09 the advances to deposits reduced to 67% which shows improvement in the bank's liquidity. Financials reveal that the deposits of the bank have grown at a faster rate than the advances, which indicate a high demand for bank's services. From FY06 to FY08, there was an increasing trend of advances to deposits; topping to 92% in FY08 which didn't bode well for the bank's liquidity position.
Both liquidity ratios have registered a decline; Earning Assets to Assets and Advances to Deposits decreasing to 80% and 67% in FY09 respectively against 82% and 93% in FY08 respectively. The decline in advances to deposits has been in line with SBP's requirement to meet liquidity and to match the maturity of loans.
DIVIDENDS
In FY09 the bank incurred heavy losses which might hamper its ability to pay dividends in the future. KASB Bank has not announced any dividends between CY05-CY09, mainly due to its inability to wipe out its accumulated losses. The bank's loss per share increased to Rs 4.45 in FY09 from Rs 1.63 in FY08. Investor confidence seems low, as the bank has to raise capital in order to meet the Rs 6 billion minimum capital requirement. In FY09 the bank had accumulated losses of around Rs 5 billion which might indicate that the bank's inability to pay dividends in future years will continue.
FUTURE OUTLOOK
Going forward, the bank is poised to respond to the challenges faced on macro and micro front. Operating with the clear objective of concentrating on its niche clientele with swift expansion of its branch network in the target market, tangible growth is anticipated to be registered in the core earnings of the bank in the months to come. The bank is also pursuing a strategy for recovering and restricting of its loans, which will reduce the provisions to NPLs and hence affect profitability.
However, the bank has been unable to meet the minimum capital requirement of Rs 6 billion (net of losses) as mentioned by SBP. Although extension has been granted, but raising equity can be a serious issue for the bank. The bank has been unable to distributed dividends since the past 5 years and accumulated losses have reached Rs 5 billion. In such a scenario it would be difficult to attract investors and raise capital through issuing shares.
With the overall economic landscape getting better, it is anticipated that the investment banking and financial advisory business would also have to offer Bank significant results. The bank aims to increase its services by offering VISA Debit cards and other value-added initiatives for the financial year 2010.
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
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